Often, funding from family is considered to be one of the convenient ways to start a business. You could be a student just out of college or a person who has left his job to do business, borrowing from family is an option for many.
Also called ‘Love Money’, it can prove to be an important resource for the entrepreneur, especially, in the initial phase i.e. to kickstart.
Many entrepreneurs, to be specific, Gen Z, are taking this approach to start their new ventures.
What is Love Money?
It is a term used in the entrepreneurial world to describe the process of raising initial capital for your business from family, friends and acquaintances.
Anybody can opt for love money but according to a recent research, a specific profile of entrepreneurs do so.
Let’s know about them in detail.
Types of Entrepreneurs seeking Love Money
First-time entrepreneurs: Individuals who are starting their first very business, and are limited by the choice of funding options.
For example, it might not be very easy for them to get a loan or crack a venture capitalist. In that case, Love Money is what they can get towards taking a first step for their dream.
Young Entrepreneurs: Younger entrepreneurs, who are still studying or working in their first job, should look for love money as a viable funding option. They might not be having any savings at this time, but can still look at entrepreneurship as an option.
Entrepreneurs without credit history: If you are new to entrepreneurship, it can get very difficult to take a loan. Especially when you do not have credit history or any collateral. In that case, you can take your family in confidence and borrow money.
Entrepreneurs testing a new concept: Individuals who have a unique and out of the box idea might not be appreciated by investors immediately. They can opt for love money and test the idea before taking it to the investors.
Risk-taking entrepreneurs: Some entrepreneurs have a reputation or are perceived to be risky by the industry. They can then turn to love money for funding.
So, these are the categories of entrepreneurs that are more likely to opt for love money. Now, let’s have a look at the kind of businesses you can start with love money.
Types of businesses that can be funded with love money
Early-stage businesses: Early-stage or seed ventures are the ones that are in the conceptual stages and need funding to get off the ground can go for love money.
Local businesses: Cafes, boutiques and local service providers fall into the category of local businesses. Anything that serves the local community such as flower delivery or local food delivery classify as local businesses. They should opt for love money.
Creative businesses: Businesses like starting an art gallery or making an independent film that might not be seen as profitable by formal lenders.
Niche businesses: Startups starting a new product or service, which has a niche demand, in a specific market, can start with love money. This is because the family might have trust in the potential of the product and will be happily willing to lend.
Early-stage Technology businesses: Tech businesses in the prototype stage can go for love money to build a minimum viable product.
Now, you have a fair idea of what love money is and what kind of entrepreneurs and businesses can be funded via it. So, if you fall into the above categories, let’s move forward and look at some of the crucial factors about love money.
Considerations before thinking about love money
Relationship Dynamics: Using love money to fund your business can significantly impact your personal relationships. We all know how delicate relationships are and money just makes it more complicated.
Borrowing from family might look convenient in the beginning, but the consequences could be challenging. The dynamics of these relationships may change or even become strained for several reasons.
Repayment: In case of a business failure, it might strain your personal relationships and put you in a lot of stress. You might want to consider the personal bond you have with your family and if you are willing to risk that.
Also, the stress of repayment can get to you in case of a delayed success in the business. As a new entrepreneur, you might be wanting to avoid it.
Changed Perception: Often, it is seen that when a family member invests in your business, there is increased interference and a change in perception. When family members become financial stakeholders in your business, their roles shift from personal relationships to more business-oriented ones.
And this can change everything, from the way you interact with each other to your daily routine. It can be too troublesome to mix business and personal, sometimes.
Communication Challenges: Communication can be hard when it comes to taking love money. It can get hard to share bad news or business challenges with family or friends for fear of worrying them or facing criticism.
Informal agreements can lead to misunderstandings. Without clear documentation, recalling the terms of the agreement accurately can become a problem over time.
Emotional Burden: As a new business, success is not guaranteed and letting down your family can bring a lot of guilt and obligation. You may feel the burden of success to ensure that your family’s or friends’ investment is safe.
Business discussions can spill into family gatherings and social occasions.
Limited Amounts: You might be having a certain amount of money in your mind with which you want to start your business. But, in case of borrowing it from your family, you might not be able to get the exact amount. In this case, the business might not get the funds required and hence lead to unwanted circumstances.
Lack of Business Validation: Validation is very important when you are starting a new business. However, in the case of borrowing from family, you might not get the right viewpoint which is required for your business. They might not give you the right advice and guide you too which a professional would.
Legal and Tax Implications: Loans from family and friends can have legal and tax implications that need to be understood and managed.
Love Money is good for your new business and your business dreams. Though we have talked about the risks associated above, there are also some big advantages to this concept. Let’s look at them and then we can later also talk about how you can cover the above risks.
Advantages of Love Money
Accessibility: It’s often easier and quicker to secure funding from your personal network, especially when you’re just starting out.
Flexibility: Investment from family can be more flexible. This includes lower interest rates, lenient repayment schedules, and the possibility of equity rather than debt financing.
Also ReadHow To Start A Side Hustle
Lower Financial Risk: These loans might come with lower or no interest rates and flexible repayment terms. Hence, the financial risk to your new business is reduced.
Emotional Support: Along with financial support, family may provide emotional and moral encouragement. During the early stages of a business, it is a big asset.
Great, right? Now that we know the benefits and the risks, let us move to the final section of this blog. Love Money is obviously a convenient option and you can mitigate risks too. Just follow the below guidelines and in case of borrowing, make yourself sound.
Let’s deep dive.
How to borrow money in the right way?
Love Money can be a real saviour but to prevent it from becoming an unnecessary burden, you must be mindful of the following steps. These steps apply to both the scenarios wherein you are borrowing from a busines family or a non-business family.
Create a Formal Agreement: Treat the loan like a business transaction with a written agreement. Put into detail the loan amount, repayment plan, interest rate, and other terms. Remember, its better to have clarity rather be shy and live in confusion.
Open Communication: Regularly update your family on your business’s progress, challenges, and financial health. This way they will be able to understand you more and even help in some cases. Adopting the right attitude can do wonders.
Set Realistic Expectations: Ensure your family understands the risks involved, including the possibility that they may not get their money back. Do not show them unrealistic dreams or promise them huge returns in the beginning.
Consult a Financial Advisor: Get professional advice to understand the legal and tax implications of borrowing from family. And make your family and friends also clear about it.
Entrepreneurship can be fun and extremely rewarding, we agree. However, we also agree that being a new entrepreneur is not easy at all. It is not a quick decision and should not be taken in haste. We hope this blog helps you in your journey ahead.
For any other help, we are right here. Contact us at or visit our website/ blog pages for more information and guidance.
All the best!
Subscribe to stay ahead with the latest updates and entrepreneurial insights!
Subscribe to our newsletter
Get access to the latest industry & product insights.